Summary: There is an exception to a previous post, which explained that a stock market crash would have only minor economic effects on America. Just as an oil crash hurts oil producing regions (e.g., Texas), a stock market crash hurts areas that produce stock certificates. Printing this “paper” is the most profitable part of the San Francisco Bay economy, putting it in the cross-hairs for the inevitable crash. We do not know when it will arrive, just that it will. (This is a slightly revised post from 2015.)
Sector crashes often harshly affect industries and regions even when the national impact is minor or even beneficial. An oil bust hurts not just oil exploration and production companies, but also regions focused on that industry (e.g., Texas) – while helping everybody else. Similarly a stock market crash will hurt companies that trade stocks (brokerage firms) and those that print stock certificates (e.g., Tesla Motors) – and areas that manufacture stock certificates. Most especially the San Francisco Bay Area.
Silicon Valley and the entire Bay area form a 21st century version of a gold rush. Money floods in and fortunes are made — but instead of exporting pretty rocks it exports papers promising future riches. This should be obvious by now. I walk through the details in these posts…
- The advertising glut dooms the social media industry.
- The key things to know about the great American bubble machine.
These industries will not disappear, any more than finance did after the 1970s crashes, or the oil industry did after the 1980s bust. But the people in these industries and the areas in which they cluster will suffer from the fall to Earth (except those people at the top, and those who got in early).
What will happen after the crash?
The venture capital industry will evaporate, except for its long-experienced super-competent core. The bursting bubble will thin the herds of biotechs, social media companies, and other bubble industries. Bankruptcies for the unprofitable while the survivors reorganize to produce cash flow and profits instead of glitzy investor presentations and clickbait headlines. That means layoffs, and wage freezes for the rest – which slowly ratchet prices and wages back towards the national averages.
The crash will force evolution of the cultures at some corporations. The New York Time’s exposé about Amazon reveals how the management squeezes its white collar workers (it doesn’t mention the sweatshop working conditions in its warehouses). Only its insanely hot stock price makes that possible, as workers toil for the chance to profit from investors’ greed – more so than their wages.
When a regional economy breaks, its real estate prices usually crash soon afterwards. San Francisco has been one of two great beneficiaries of the debt supercycle since 1982. The result of its field of dreams burning will not be pretty. For its history see this March 2018 report by Paragon Real Estate Group (click to enlarge graph). Imagine the effect when the prices revert, something unimaginable to many in the region.
A real estate crash in a hot property market begins a second wave of economic decline for the affected region. People with no-recourse mortgages walk away from their loans (“jingle mail” for the banks) and seek new opportunities elsewhere. Prices will drop far. Not down to the levels of Buffalo or Iowa City, but to those of a premium urban center. San Francisco will be much like Oz, the Emerald City, after its people take off their green glasses.
Conclusion
Crashes are part of the business cycle, not the apocalypse. Boom-bust cycles are an inherent aspect of free market systems. They occurred in 19th century Britain, with its gold-based currency and no fractional reserve banking.
Sometimes government policy restrains the formation and development of bubbles. Sometimes – like now – it magnifies them.
The important policy action after the crash is helping affected people (minimizing the pain), not making the downturn worse (e.g., the Fed should stop raising interest rates). For long-term benefit we need to better manage these cycles. Investors being less gullible is a good first step. Only fools allow insiders to blow two bubbles in 20 years.
(5) For More Information
Other recent reports about Bay Area real estate by Paragon.
- Bay Area Real Estate Markets Survey, February 2018.
- Long-Term Trends in San Francisco Real Estate, March 2018.
- See all their market reports.
Please like us on Facebook, follow us on Twitter, and post your comments — because we value your participation. Updates to this post appear in the comments. See all posts about bubbles, especially these…
- The new tech bubble takes us to a new world. A mad world.
- How we’ve become accustomed to bubbles bursting the economy, instead of fighting them.
- We see a stock market bubble but prefer to close our eyes.
- Playing The Bubble Game: Investing In The 21st Century — at Seeking Alpha.
Ideas! For shopping ideas, see my recommended books and films at Amazon.
(6) Great books about bubbles
Extraordinary Popular Delusions and The Madness of Crowds
Manias, Panics, and Crashes: A History of Financial Crises
You need to get out more. It was all going to fall into the ocean after the dot-com, after the housing-bubble and now something else in the ‘future.’ Did Peter Schiff die or something?
“People with no-recourse mortgages walk away from their loans”
What real people are actually doing is paying cash for trash heaps in North Oakland. I’m sure when there is a correction they will all abandon their Volvos and lattes and flee back to Buffalo.
Go ahead, bring your pre-approved mortgage to SF or the valley and watch the intern at the front desk of Paragon LoL.
“Crashes are part of the business cycle, not the apocalypse. Boom-bust cycles are an inherent aspect of free market systems. They occurred in 19th century Britain, with its gold-based currency and no fractional reserve banking.
Sometimes government policy restrains the formation and development of bubbles. Sometimes – like now – it magnifies them.”
Succinctly put! Since the govcession of 2008, the nation economy has
been under the dictates of the Central Bank. In the past seventeen years,
14 of them have been subject to what I call – FedZero, abnormally low interest
rates, which in due course has driven asset prices held by upper income groups.
This effectively removed income from savers and subsidized debtors. Moreover, this
will have a distortion on capital investments and efficiency, as the cost of borrowing
has decline to record lows. An example are corporate share buybacks. It is, IMO,
one of the least efficient use of capital, which does not grow corporate earnings but
rather drives earnings per share, much to the gleam of upper management, so dependent
upon receipts of free shares rewards.
The longer that this Fedconomy last, the greater the pain. Corportative debt now at 45%
of GNP, totaling $8 trillion dollars; of which 15% is probably junk class. Moreover, it is the
second longest running bull market in history, which should throw up warning flags; with
margin debt having tripled since 2008 to nearly 1/2 trillion dollars.
If 1st quarter GNP report is weak, as I suspect it will, it should raise even more alarm
bells for prudent investors, signaling for more defensive measures.
Even “OOO” (oracle of Omaha) warned shareholders to prepare to lose 1/2 of their
holdings! A frank and frightful proposition for prudent investors.
Mr Kummer, interesting comment on the Bank of England.
Bill,
“In the past seventeen years, 14 of them have been subject to what I call – FedZero, abnormally low interest rates, which in due course has driven asset prices held by upper income groups.”
That’s quite false, however often said by right-wingers. First, market-set interest rates closely match the Fed Funds rate. Compare the upper range of the Fed Funds target rate with the market rate of short-term t-bills.
Second, the Fed intervenes in the interest rate markets by buying and selling securities. Their balance sheet has been flat since QE3 purchases ended in October 2014.
The Fed began tightening with its increase in the Fed Funds rate in December 2015. Soon it will begin a second form of tightening by selling off the securities it holds, decreaseing the size of its balance sheet.
For more about this, see Today’s mythbusting: the Fed is not suppressing interest rates.
I am from the Bay Area and have lived here my entire life. I have a master’s degree, work in finance, and do well. The best thing that could happen to me is a tech crash.
The tech industry makes it more crowded here and drives up housing prices. Make $200K a year in SF and you can’t afford to buy a house in a safe neighborhood with less than a 45 minute commute. The median 2 bedroom condo price in the city is pushing $1MM. People from here watch their kids leave or live at home indefinitely. The traffic is unreal and the homelessness is out of control.
And for what? Stupid phone apps for other techies? Or worse, automating other jobs out of existence? Tech contributes little positive to the local economy except in the areas of coffee, beer, food, and garbage jobs like Uber driving. The techies just take the money from stock options and bid up real estate prices. Most people here do not depend on the tech industry economically, directly or indirectly. The tech economy is cordoned off and people outside that world get externalities, not imaginary spillover benefits.
We’d be hella better off without the tech industry.
Bay Area,
“Tech contributes little positive to the local economy …. The techies just take the money from stock options and bid up real estate prices.”
Wow. That’s really false. First, the spending by those companies and their employees is a big part of the local economy.
Information services is a small part of Bay area employment and GDP, but for decades has provided most of its growth. The largest sector is “Finance, insurance, real estate, rental” — is 25% of total GDP (see GDP by sector), and almost totally dependent on the investment by companies and employees of tech companies.
Tech is bigger in the Bay Area than oil was in 1980s Texas (which did and does have a diversified economy), yet the oil bust severely damaged Texas’ major cities.
I had a similar debate in 2007 about the housing bubble. Construction and finance was 15% of GDP in many medium-size California cities. My commenters confidently said that a housing downturn wouldn’t be a big deal for those areas. We know how that worked out.
I work in tech nearby and you’re 100% correct. The entire industry has become a farce of pointless crack apps to generate ad revenue. Almost no hardware is made like in the past.
What you’ve described is true for all of California though. It’s sad what happened to this state, though it’s because of our voting and bringing in 15 million people from Latin America who are turning it into Latin America
PRCD,
The value of the tech industry’s product is not a big factor. Oil is an essential product, but the 1980s oil bust produced an economic crash in parts of Texas.
The stock market is not going to crash. Individual companies will continue to suffer in different sectors, but the indicies can stay high (up-down) due to manipulation of SHORT ETFs. It is the NEW INVESTORS who will SUFFER buying MANY stocks at ALL-TIME highs. I would buy AMZN, BA, AAPL, MSFT, V/MA, NVDA, EL, FB, HUM. but at much LOWER prices not at ALL-TIME HIGHS. A CRASH would be nice, yet SHORT ETFs do NOT have much upside.
Tom,
“The stock market is not going to crash.”
The stock market has crashed, and will crash again. Please read more carefully. I did not say when it will crash. This post looks at the effects on the Bay area.
Please, no investment discussions here.
Love this expert content. Where else can you find out that stock markets crash?
Chonus,
“Where else can you find out that stock markets crash?”
That’s quite a reading FAIL.
In terms of U-Haul rates, the bay area has peaked.
https://www.sfgate.com/expensive-san-francisco/article/U-Haul-San-Francisco-Bay-Area-prices-shortage-12617855.php
Bill,
Wow. I knew about the inbound/outbound price gap. But not that it was so large! As you say, this is a bad sign. Here is the report:
http://www.aei.org/publication/san-francisco-bay-area-experiences-mass-exodus-of-residents-reflected-in-one-way-u-haul-truck-rental-rates/
“Ashamed to work in Silicon Valley: how techies became the new bankers” in The Guardian– “Wall Street has long been the industry people love to hate. But as big tech’s reputation plummets, suddenly a job at Facebook doesn’t seem so cool.”
I am curious about this: how big is the phenomenon of “ghost buildings” and “ghost apartments” in San Francisco, aka the buying of real estate for purely speculative reasons and/or preservation of capital (legitimate or not) without any intent to occupy said real estate? It has become a plague in so many cities around the world, emptying entire areas of people or activity, boosting the prices to levels unbearable to most locals while not even replacing them with new inhabitants, reducing the tax base in many cases, influencing construction towards luxury buildings in which nobody will ever live. The proportion of this in the urban markets has become far from anecdotal and accompanies gentrification. When one hears that the planet is awash in cash but seldom sees it invested in anything aside from niche sectors, one just has to watch through a window: the skyline of your city IS where an enormous chunk of that cash is (along with treasury bonds of various countries considered reliable). A big pile of almost complete macro-economical uselessness.
Sorry for the rant. Coming back to my initial enquiry: are there a lot of empty buildings (residential and commercial) in San Francisco?
tancrede,
Holding empty apartments or homes is a serious problem in some areas, but there is little evidence of it in San Francisco. Here is one of the many articles discussing it, noting the absence of evidence.
Tancrède,what you mentioned is a major issue in Vancouver, as foreign
buyers, paying cash, have purchased so many homes for reasons other
than homesteading that it has created the most expensive real estate
in, Oh Canada!
Governmental units have instituted tax levies in order to stem foreign
real estate purchases which do not occupy the dwelling.
As for Silicone Valley, the marketplace will duly disgorge products and
services which are viewed redundant.
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